Greek Contagion Not Contained

The real threat is the risk Greece poses to banks – not just in Greece, but throughout Europe. While we were ensconced in the Fiscal Summit on Wednesday, Rob Parenteau called frantically alerting us to his forecast that civil unrest in Greece in particular, and Europe generally, was about to get worse.

“With no restraints on capital flows within the European Union,” Eric Sprott of Sprott Asset Management explains, “Greek savers are free to transfer their assets elsewhere. Given that bank deposit guarantees in Greece are the responsibility of the national government, rather than the European Central Bank, we suspect Greek citizens are pulling money out of their banks because they question their government’s ability to honor its domestic deposit guarantees.

“We envision Greek depositors asking themselves how a government that can’t raise enough money to stay solvent can then turn around and guarantee their bank deposits? It’s a fair question to ask.

“It’s a vicious spiral from financial crisis to sovereign debt crisis to banking crisis, and there is no reason it can’t spread to other European countries suffering from similar fiscal imbalances. With Spain and Portugal next in line with their own sovereign debt issues, we can expect depositors in these countries to make similar runs to the bank for their cash.”

Indeed. Look at what’s happening to the credit default swaps on Spanish and Portuguese banks…

Spain’s looking twice as risky as Germany and France. Portugal, three times.

He is also the executive producer of and a writer of I.O.U.S.A. a feature length documentary film nominated for the Grand Jury prize at the 2008 Sundance Film Festival. The film is inspired by the international bestsellers Financial Reckoning Day and Empire of Debt, which he coauthored with Bill Bonner.